Sanctions Against Russia and Section 1782 Discovery
April 10, 2023
Since the “military operation” in Ukraine began in 2022, Russia has become the most sanctioned country in the world. U.S. blocking and sectoral sanctions now cover numerous Russian entities, especially banks, which were the most active litigants in transnational disputes. The U.S.-Russia relationship is probably at its worst in 30 years, and Russia has officially designated the United States a “non-friendly country.”
Russian parties have traditionally been active in U.S. courts, especially over the past decade. Russian banks, state-owned companies, and bankruptcy trustees have successfully sought discovery or enforced judgments in the United States. Recent cases have tested the effect that U.S. sanctions will have on Russian parties’ ability to obtain discovery for use in foreign proceedings under 28 U.S.C. § 1782.
Sanctions Against Russia
In 2022 and 2023, most Russian entities were sanctioned pursuant to Executive Order 14024, by which President Biden declared a national emergency to deal with the threat posed by “specified harmful foreign activities of the Government of the Russian Federation.” The U.S. sanctions regime strongly affected entities and individuals added to the Specially Designated Nationals and Blocked Persons List (SDNs). U.S. persons are generally prohibited from dealing with SDNs, and their assets in the United States are blocked. In addition, under the “fifty-percent” rule, sanctions automatically cover entities owned 50% or more by an SDN.
As a result, most SDNs are not even able to pay their lawyers or experts in the United States, unless they obtain a specific license from OFAC. Moreover, it is particularly difficult, although not impossible, for Russian companies to transfer money to the United States. Despite these constraints, however, SDNs and other sanctioned entities from Russia generally continue to have the same access to U.S. courts. Because sanctions primarily target economic activities, there is no prohibition for sanctioned entities to bring or defend court proceedings in the United States.
Section 1782 Discovery
Discovery under § 1782 is an exceptionally effective tool for foreign litigants. In asset recovery cases, for example, it allows creditors to trace a debtor’s financial assets or prove that the debtor has concealed them. Guidance on how § 1782 discovery works and what standards apply is provided in TLB’s Primer on Transnational Discovery. For the purposes of discussing U.S. sanctions, the following features of § 1782 are particularly relevant.
First, district courts have broad discretion as gatekeepers when considering discovery applications. Still, they must exercise that discretion in light of the twin aims § 1782 discovery: (1) providing efficient means of assistance to participants in international litigation and (2) encouraging foreign countries by example to provide similar means of assistance to U.S. courts.
Second, district courts generally apply the Intel test when exercising their discretion. Among other factors, courts consider whether the discovery request conceals an attempt to circumvent the policies of a foreign country or the United States, which also extend to economic sanctions.
In light of the sanctions against Russia, one can reasonably ask whether U.S. courts should still provide assistance to sanctioned Russian applicants and whether the discovery sought for their benefit circumvents U.S. policies. It did not take long for parties against whom § 1782 discovery was sought to raise these issues before U.S. courts. On March 7, 2023, the federal District Court for the District of Connecticut made an interesting ruling in National Bank Trust v. Belyaev.
National Bank Trust v. Belyaev
The applicant in this case, National Bank Trust (NBT), is a Russian bank owned by the Central Bank of Russia. Its mission is to recover bad debts in Russia and worldwide, which is why NBT is noticeably active in transnational disputes.
In 2016, NBT brought an action against its former owners, including Sergey Belyaev, in the High Court of Justice of England and Wales, alleging major fraud and misappropriation of the bank’s assets. In January 2020, the English court entered a judgment for $900 million against the defendants.
NBT also sought discovery in the United States under § 1782 to obtain information about funds that Belyaev transferred to a U.S. company in connection with the English proceedings. The district court granted discovery on January 13, 2021. However, Belyaev later moved for a protective order to halt the discovery entirely, arguing that it “violates the letter and spirit of U.S. sanctions.”
The court addressed two main issues in this case: (1) whether any provision of the U.S. sanctions regime constrains the Court’s § 1782 authority, and (2) whether the executive department’s policy toward Russia, as evident in the sanctions regime, should be weighed as a discretionary factor in the § 1782 analysis.
The Letter of U.S. Sanctions
As the Second Circuit held in Empresa Cubana del Tabaco v. Culbro Corp., a court must deny the relief sought if doing so would violate U.S. sanctions. In Belyaev, the court concluded that NBT was not even subject to sanctions by the United States. As mentioned above, NBT is owned by the Central Bank of Russia. The Central Bank was sanctioned under Directive Four of Executive Order 14024, and the “fifty-percent” rule does not apply to it. That is, even though the Central Bank owned NBT, the sanctions imposed on it did not extend to NBT.
But the district court did not stop there. It went on to hold that even if NBT were sanctioned under Directive Four, that would still not prevent the bank from seeking discovery because there would be no U.S. sanctions violations.
Based on OFAC’s official comments, the court noted that “prohibited transactions” under the U.S. sanctions regime must have an element of “reciprocal exchange of property typical of trade or financial transactions.” For ex parte discovery applications, this element of reciprocal exchange is necessarily absent. The court held that whether further enforcement steps by the applicant would violate sanctions are speculative at the discovery stage and not appropriate to consider in a § 1782 action.
In this regard, the court referred to Deposit Insurance Agency v. Leontiev (S.D.N.Y. 2018), one of the first cases in which a respondent tried to oppose discovery by arguing that it would violate U.S. sanctions. There, a Russian banker Sergei Leontiev argued that providing discovery would “deliver property” to a sanctioned lawyer Andrey Pavlov and indirectly violate the Magnitsky Act of 2012. But the court rejected that argument, holding that the recipient of a document in discovery does not gain a property right.
The Spirit of U.S. Sanctions
The court analyzed the argument concerning the spirit of U.S. sanctions under the third Intel factor, which asks whether a § 1782 request conceals an attempt to circumvent “other policies” of the United States. Citing the U.S. amicus brief in Intel, the court concluded that the policy grounds on which district courts can deny § 1782 requests do not tend to involve the executive branch’s policy favoring or disfavoring a particular foreign entity. The court emphasized that this rule applies with special force in the context of economic sanctions, citing recent statements by the Department of State and the Treasury that OFAC expressly permits “[a]ll other activities with entities determined to be subject to the prohibitions of this Directive [Directive Four],” and “over-compliance with sanctions risks upsetting the precisely tailored balance struck by the sanctions regime.”
Belyaev contended that under § 484 of the Restatement (Fourth) of Foreign Relations Law, a U.S. court “need not recognize a judgment of a court of a foreign state if: … (c) the judgment or claim on which the judgment is based is repugnant to the public policy of the United States.” However, even setting aside the fact that discovery is not an action to enforce a foreign judgment, the court reasoned that a comment to this provision supported the contrary conclusion, since the test for public policy is “a stringent one,” and Belyaev’s arguments did not rise to the level of violating U.S. public policy. The court also noted that NBT sought discovery in support of U.K. proceedings and that the U.K. government has imposed its own sanctions against Russian entities.
Therefore, the court in Belyaev concluded that § 1782 discovery, even when sought by a sanctioned Russian entity, does not violate the letter and spirit of U.S. sanctions. Although NBT was not sanctioned, and the court did not address other provisions of Executive Order 14024, the same reasoning can be applied to SDNs.
Other Recent Cases
Courts in other § 1782 proceedings after February 2022 have reached conclusions that are consistent with Belyaev.
In Otkritie v. Mints, the district court granted § 1782 discovery in support of English proceedings to a blocked Russian bank Otkritie and NBT, without addressing U.S. sanctions issues. The respondents, the Mints family, did not raise any such objections. On the other hand, in the English proceedings, they argued that the court could not lawfully enter a judgment, as that would amount to a prohibited dealing with “funds” or “economic resources” contrary to the sanctions regime. The English court rejected their arguments, holding that the entry of judgment is not a fund or economic resource and that lawmakers did not intend to deviate from “the fundamental right of access to the court.”
In National Bank Trust v. Ananyev, the respondents unsuccessfully tried to vacate a discovery order in support of proceedings in Cyprus. They argued that “a Russian entity should not be permitted to retain the discovery already produced to it or obtain further discovery by reason of the Russian invasion of Ukraine.” Because NBT was sanctioned by the European Union, the respondents asserted that the second and third elements of the Intel test were not met, but the district court rejected both arguments. For the second element (the receptivity of the foreign court to U.S. federal court assistance), the court held that the respondents had not shown that a court in Cyprus would reject evidence gathered pursuant to the discovery order or that the subsequent EU sanctions would extend to discovery that was obtained prior to the sanctions. For the third element, the court reasoned that OFAC had not blocked NBT, and it was doubtful that any future blocking sanctions could be retroactively applied to documents already transmitted to a foreign country. However, the court did not further analyze whether the outcome would have been different had OFAC blocked NBT.
The latest § 1782 application, National Bank Trust v. Shishkhanov, was filed by NBT on January 10, 2023, in support of civil proceedings in the British Virgin Islands (BVI). One of the “targets” in the case, Cargill, Inc., argues that the BVI court would not have jurisdiction and “applicable sanctions may otherwise make it practically impossible for NBT to proceed with its claim in a BVI court.” Based on these arguments, Cargill asserts that under § 1782 “NBT cannot demonstrate, as it must, that the discovery it is seeking from this Court would be for use in any BVI proceeding that is in ‘reasonable contemplation.’”
The district court has not yet ruled on the application. However, in light of other relevant decisions, it is doubtful that the court will agree that sanctions prevent the plaintiff from pursuing its claim in the BVI. As explained above, sanctions target economic activities. They might concern the enforcement of a judgment at a later stage but not court proceedings themselves. Furthermore, the sanctions regime has not thus far prevented Russian plaintiffs from pursuing their claims in the BVI. For example, in JSC VTB Bank v. Katunin, the BVI court refused a request from a law firm to stop representing a sanctioned Russian bank and asserted that the UK’s sanctions had not curtailed the bank’s “right to litigate.”
So far, respondents have been unsuccessful in their attempts to challenge § 1782 discovery by referring to U.S. sanctions against Russia. Although the scope of sanctions against Russia is unprecedented, the broad U.S. approach to discovery has not changed, even with respect to sanctioned Russian entities.
In Belyaev, the court has clarified that (1) § 1782 discovery does not violate the letter of U.S. sanctions because it lacks the required element of “reciprocal exchange of property,” and (2) it does not violate the spirit of U.S. sanctions because, under the third element of the Intel test, U.S. public policy does not include sanctions disfavoring a particular foreign entity as a basis to deny relief to which that entity would otherwise be entitled.
To succeed, in future cases, respondents will likely have to demonstrate something more than the mere fact that the applicant is a sanctioned Russian person. However, it is hard to imagine a situation in which § 1782 discovery could actually be used to circumvent applicable U.S. sanctions. Discovery itself does not result in the transfer of money or property, and, as held in Belyaev, potential indirect violations of sanctions are too speculative at the discovery stage. On the other hand, real disputes concerning the scope and application of U.S. sanctions may arise if the applicant, at a later stage, decides to commence litigation against U.S. residents or execute against assets located in the United States.